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Big pharma will increasingly tap M&A to close $100 billion growth gap, but path to deals grows more complex

Ernst & Young's newly released "Firepower Index" finds big pharma's capacity for M&A has decreased just when it needs transactions for growth and shareholder returns

SAN FRANCISCO, Jan. 7, 2013 /PRNewswire/ -- Big pharma companies are facing a widening "growth gap" that will increase pressure to drive growth through mergers and acquisitions (M&A).  But big pharma's attempts to make deals will be challenged by its diminished resources and fiercer competition for attractive assets from rapidly growing big biotech and specialty pharma companies. These and other findings were released today by Ernst & Young in the report Closing the gap? Big pharma's growth challenge and implications for deals.

"While the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive," said Glen Giovannetti, Ernst & Young's Global Life Sciences Leader. "Life sciences companies that are positioned appropriately should benefit from increased competition and see higher premiums. However, the finite resources of many big pharma companies and the need to make prudent acquisitions to address the immediate growth gap mean they will likely be even more selective about the targets they pursue."

Big pharma's growth and "firepower" gaps

With continued flat sales in mature markets, big pharma—defined as the 16 largest US, European and Japanese pharma companies measured by revenue—has increasingly looked to emerging markets to drive overall revenue growth. However, a slowdown in these markets as a result of various factors has widened the "growth gap" facing the industry. By comparing the gap between IMS Health's forecast for the global drug market and industry analysts' estimates of big pharma sales over the next 3 years, Ernst & Young estimates that this growth gap will reach approximately US$100 billion by 2015. In other words, big pharma will need an additional US$100 billion in revenue in 2015 just to keep up with overall market growth.

Thanks to a flat outlook in developed markets— in part a result of stagnation in the Eurozone — and a slowdown in emerging markets, sources of organic growth are under pressure. As a result, many big pharma companies are likely to accelerate their search for inorganic growth through M&A in 2013. However the capacity of big pharma to conduct such deals has diminished in recent years. This is due to less available operating cash resulting from slower revenue growth— due partly from continued pressure on drug pricing — and increased borrowing to fund higher dividends, stock repurchases and previous transactions. According to Ernst & Young, the financial capacity or "firepower" of big pharma to conduct deals has declined by 23% between 2006 and 2012.

Big pharma's new competition for assets

Even as big pharma's deal making ability has shrunk, the firepower of big biotech and specialty pharma (including generics) companies has increased. According to Ernst & Young's Firepower Index, between 2006 and 2012 the firepower of big biotech has increased by 61% while specialty pharma's firepower is up 20%. As a result of these shifts, big pharma's share of the combined acquisition capacity of these three segments has fallen from 85% in 2006 to 75% in 2012.

Implications for 2013 and beyond

In addition to a more competitive and complex deal environment, the report identifies several key trends for transactions in the coming months and years.

  • More bolt-on acquisitions: Only a handful of big pharma companies now have the firepower to pursue M&A targets above US$60 billion. However with big biotechs and specialty pharma having joined big pharma in their capacity to engage in smaller deals, more bolt-on acquisitions are anticipated.
  • More divestitures: As pharma companies look to boost firepower and sharpen their strategic focus, it is likely they will consider more divestures of non-strategic assets. Both corporate investors and private equity are seen as likely acquirers.
  • More offshore deals and emerging markets deals: The need to address the growth gap will drive pharma companies to look for attractive acquisitions everywhere. For US buyers, high tax rates in the US may increase the attractiveness of using offshore cash reserves to buy non-US companies. With 2012 emerging market sales growth rates for big pharma declining by about 50%, many companies will need to close this gap through more deals in emerging markets.

"With fewer options for organic growth, pharma companies will need transactions and, more than ever, measures to build and conserve firepower are vital," said Jeffrey Greene, Ernst & Young's Global Life Sciences Transaction Advisory Leader. "Pharma companies addressing the growth gap through M&A will seek to increase and preserve their firepower by improving working capital management, divesting non-strategic assets, conducting more careful strategic diligence to ensure targets are valued appropriately in the face of stiffer competition, and employing novel deal structures to mitigate risk."

About Ernst & Young's Global Life Sciences Center

Ernst & Young's Global Life Sciences Center brings together a worldwide team of professionals to help life sciences companies address their challenges at every stage of development. From the emerging biotech or medtech firm to the well-established, global pharmaceutical company, our industry teams bring deep experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify implications and develop points of view on relevant industry issues. Whether it's forming innovative alliances, improving operations, new regulations or exploring new markets, we can give you a clear perspective on how to drive value in an increasingly complex, competitive and risk-driven environment. It's how Ernst & Young makes a difference. For more information, please visit or email [email protected]. You can also connect with us on our Changing Business of Life Sciences blog,

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transactions and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit

This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.

Daniel Cusworth

Gregory Kelley

Ernst & Young Global Media Relations 

Feinstein Kean Healthcare

+44 (20) 7980 0402

+ 1 404 881 2302

[email protected]  

[email protected]


SOURCE Ernst & Young

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